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CONTRACTS: NOVATION

Case Name: Heirs of Servando Franco vs. Spouses Veronica and Danilo Gonzales
G.R. No.: G.R. No. 159709
Date: June 27, 2012
Petitioner: Heirs of Servando Franco
Respondents: Spouses Veronica and Danilo Gonzales
FACTS:
Defendants Servando Franco and Leticia Mendel obtained loans from Veronica Gonzales
for the latter was engaged in the business of financing under the company Gonzales Credit
Enterprises. There were three loans which the Servando and Leticia secured with the respondent,
which was not paid on maturity. The third loan was secured by a property was owned by one
Leticia Makalintal Yapintchay, who issued a special power of attorney in favor of Leticia Medel,
authorizing her to execute the mortgage. The fourth loan was engaged with Dr. Rafael Mendel,
the husband of Leticia Mendel of P 60,000 by executing a promissory note which consolidates
the other previous loans which totals to P 500,000.
Upon maturity of the new promissory note, the defendants failed to pay their obligation.
So, the plaintiffs filed a complaint for the collection of the full amount of the loan, plus interests
and other charges. Servando contended that he did not obtain any loan from the respondents, he
was not benefited from its proceed and he signed the promissory note as a witness.
With the various appeals and motion for reconsideration with the RTC and CA, it was
decided that the parties should be liable for the loans. Servando opposed that he and the
respondents had agreed to fix the entire obligation at P775,000.00. According to Servando, their
agreement, which was allegedly embodied in a receipt dated February 5, 1992, whereby he made
an initial payment of P400,000.00 and promised to pay the balance of P375,000.00 on February
29, 1992, superseded the July 23, 1986 promissory note. But the RTC ruled over Servandos
opposition and moved to the execution of the judgment for it is final and executory. Then,
Servandos heirs, on account of his intervening death, appealed that there was novation is the
judgment that transpired upon the decision of the court on December 9, 1991 and February 5,
1992.

ISSUE: Whether or not there is novation between the judgments rendered by the courts?
HELD:
No, the court rule that there is no novation when there is no irreconcilable incompatibility
between the old and the new obligations. There is no novation in case of only slight
modifications; hence, the old obligation prevails. Extinguishment of the old obligation is an
necessary element for novation and the new one will arise from such.

Novation arises when there is a substitution of an obligation by a subsequent one that


extinguishes the first, either by changing the object or the principal conditions, or by substituting
the person of the debtor, or by subrogating a third person in the rights of the creditor. For a valid
novation to take place, there must be, therefore: (a) a previous valid obligation; (b) an agreement
of the parties to make a new contract; (c) an extinguishment of the old contract; and (d) a valid
new contract. In short, the new obligation extinguishes the prior agreement only when the
substitution is unequivocally declared, or the old and the new obligations are incompatible on
every point. A compromise of a final judgment operates as a novation of the judgment obligation
upon compliance with either of these two conditions.

On the receipt of February 5, 1992 did not create a new obligation incompatible with the
old one under the promissory note that was issued. It was only a payment of the obligation of
Servando and did not establish a new obligation. The Court ruled that the payment of the
obligation does not novate the instrument that only expressly recognize the old obligation, or
changes only the terms of the payment, or adds other obligation that is not incompatible with the
old ones, or the new contract merely supplements the old one. The new contract that is a mere
reiteration, acknowledgement or ratification of the old contract with slight modifications or
alterations as to the cause or object or principal conditions can stand together with the former
one, and there can be no incompatibility between them. Moreover, a creditors acceptance of
payment after demand does not operate as a modification of the original contract.
Novation is not presumed by the parties, there should be an expressed agreement that
would abrogate the old one in favor of the new one. In the absence of the express agreement, the
old and the new obligation should be incompatible on every point. The incompatibility of the
obligation is that the two obligations cannot stand together, each one having independence from
each other.
Thus, the court affirms the decision of the CA promulgated on March 19, 2003.